Bank of America, UBS settle swap dispute with Italy's Lombardy

The region said banks hid fees

Bank of America Corp. and UBS AG reached agreements with the Italian region of Lombardy to settle a dispute involving derivatives linked to $1 billion of bonds.

Terms of the settlement weren’t disclosed in a joint statement from the northern Italian region and the banks today. The agreement came after the lenders sued Lombardy in a London court to uphold the swap they arranged in 2002 that allowed the municipality to repay a bond in instalments rather than with a one-time repayment when it matures in 2032.

The banks set up a fund to invest the city’s repayments until the debt matured. Lombardy last year set aside 153 million euros ($199 million) for potential losses on Greek bonds the fund purchased and alleged the banks committed fraud by hiding their fees.

The agreement with Bank of America allows for “improving the swap’s management and continuing the collaboration,” the local government said in today’s statement. The separate accord with Zurich-based UBS ends the dispute, the region said without elaborating. Officials at UBS and Lombardy declined to comment on the terms of the agreement. A spokesman for Bank of America in London didn’t immediately return calls seeking comment.

A probe by Milan’s prosecutor found UBS and Merrill Lynch hid 95 million euros in fees when they sold the region of Lombardy derivatives. The prosecutor ended the probe in 2010 because it would have breached the statute of limitations.

Today’s settlement comes weeks before a judge in Milan rules on whether four banks, including UBS, should be convicted of fraud over a separate sale of derivatives to the city.